Everything evolves. Even the commodity story. Take this week’s production figures from BHP Billiton and Rio Tinto. BHP’s first quarter iron ore production was down 8% from the previous quarter. Rio’s iron ore production was up. But its copper production was down 18%. BHP cited the cyclone season as the reason for the iron ore decline and Rio said lower US ore grades affected copper output.
Neither figure means iron ore or copper production is in crisis. But we reckon the figures are a reminder of something nearly all of our speakers said last month at the After America symposium in Sydney: the next 10 years of the commodity bull market won’t be anything like the last 10 years. The best investments of the last 10 years are probably not going to be the best investments of the next 10 years.
This doesn’t mean there won’t be good investments. For example, both BHP and Rio are poly-metallic miners. They aren’t just copper and iron ore companies. BHP has a huge energy business. That business, in our reckoning, will probably drive most of its earnings growth.
This is all part of the development cycle of emerging markets – assuming they don’t blow up from their own debt crisis, a US dollar collapse, or their own internal pressures (see China). The record profits and great share price performance of bulk materials companies such as BHP and Rio were driven by two factors: a huge and unexpected surge in demand and an inability to boost supply in response to that demand quickly.
But as industrial and base-metals-driven growth in China abates (a decline in fixed-asset investment and an official shift to more consumption-led growth and less export-led growth), China’s demand for Australian commodities will shift to other markets. Those markets may be even more lucrative. Alex Cowie is working on just one these stories in his upcoming report of Diggers and Drillers.
There’s no guarantee this transition will be seamless. In fact, we recall Greg Canavan’s speech in Sydney last month, The Myth of the Seamless Transition. Great periods of monetary instability are a nightmare for investors. It’s nearly impossible for you to perfectly protect your portfolio from value destruction. You have to work really hard at it.
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From the Archives…
What the News on Bond Yields Say About the “Resolved” Eurozone Crisis
2012-04-13 – Eric Fry
The Art of Selling Stocks
2012-04-12 – Chris Mayer
Misguided Faith in an Economic Recovery
2012-04-11 – Joel Bowman
Beware the Big Government Debt Switcheroo
2012-04-10 – Dan Denning
The Discount Rate: Borrowers, Lenders and Bonds
2012-04-09 – Nick Hubble